Jump to content

Cycles


innerscorecard
 Share

Recommended Posts

Investors often write about cycles - we are in "X part of the Y" cycle. But I feel like I lack a rigorous definition of market, industry and business cycles generally.

 

Anyone have any resources that have helped them with this? I have read, for example, what Howard Marks has written on cycles, but it is just a discussion from first principles, and does not have any real data or history.

Link to comment
Share on other sites

Except in the extremes (2000, 2009, etc) you really don't know until it's over and can look back. Cycles look nice and pretty on historical charts but it's not that easy in the moment. I like Buffett's recent comment which was basically we're in the zone of reasonableness, beyond that he doesn't know. Of course we're in an up cycle, but it could keep going up for 5 years or today could be the peak--no one knows until it's over with (and the next cycle begins...).

 

That probably doesn't answer your question, just some thoughts that came to mind reading your post.

Link to comment
Share on other sites

Except in the extremes (2000, 2009, etc) you really don't know until it's over and can look back. Cycles look nice and pretty on historical charts but it's not that easy in the moment. I like Buffett's recent comment which was basically we're in the zone of reasonableness, beyond that he doesn't know. Of course we're in an up cycle, but it could keep going up for 5 years or today could be the peak--no one knows until it's over with (and the next cycle begins...).

 

That probably doesn't answer your question, just some thoughts that came to mind reading your post.

 

It's interesting that the thread on the shape of Buffet's nose got a lot more comments than this thread.

 

Yeah, I know it's hard, and might even be so difficult to call where we are in a cycle that it's not worth it. It's just interesting because the discussion of cycles seems to rest on principles that are implied - but what are those actual principles based on?

Link to comment
Share on other sites

Its very tough to tell when a new cycle begins and when it ends i.e. tough to predict the duration and as well as the trough/peaks. Its almost as tough as timing the market.

 

This I know from experience though- its very easy to lose money by buying a cyclical businesses at cyclical peaks paying a market multiple for trailing earnings (or worse linearly extrapolated forward earnings).

 

Since we don't know where we are in the cycle at all times, it is always prudent to pay heavily discounted multiples for cyclical businesses (ideally below market multiples to where you expect the trough earnings could be - but even this is hard). Its especially difficult, because if it is a good business, at trough earnings it will trade at a high multiple and at peak earnings it will have a market multiple.

Link to comment
Share on other sites

Go by the textbook, & you cannot know where you are in a cycle until it is over. Look more critically- & you will notice that the metrics were calculated on trailing earnings because they are verifiable, & the article was written from an academic viewpoint. Cycles do exist, we are all aware of them, & most of us actually do have a pretty good idea of where we are in them - we just don't act on it.

 

The problem is that we could be wrong (so do high, medium, low), & that we have little confidence in our number - because we cannot verify it anywhere else. An analyst cuts his/her employment risk, by staying within the herd consensus - even if he/she thinks the consensus may well be wrong. A PM has a similar problem, but more flexibility. While individuals do not have the restriction, most do not have the background or ability to do the projection either.

 

Look at forecast forward earnings, adjust for the possibility that you may be over/under optimistic, & it becomes very obvious. Nobody knows the future, but we all take our best guess - from there its just our confidence in our own decisions.

 

SD

 

 

 

Link to comment
Share on other sites

I have been reading Martin Armstrong's writings about cycles since 2008 or so. I pay a lot more attention now to capital flows and the fact that everything is connected through thousands of interacting cycles. Last year for instance, his writings convinced me to move heavily into USD investments. The first essay I read is called "Its Just Time" which is a good an intro as any. If his predicted big bang (bond defaults) occurs at the end of September as he has long been predicting cycle theory will likely become more popular. Hayek's papers about cycles are excellent especially the one that describes Ponzi lending which proved useful to me just prior to 2007. When you see rampant Ponzi lending get out!

Link to comment
Share on other sites

I was listening to an interview from Jeremy Grantham and he made the comment that every single recession is preceded by an asset bubble. If we pay attention to obvious asset bubbles we should have a warning of what is to come. The hard part is timing.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...